EBRD: Suc­cess­ful tack­ling of NPL lev­els will help boost lend­ing in SEE

Top 100 See - - Top 100 Banks - By Ge­orgi Ge­orgiev

What trends marked the de­vel­op­ment of the bank­ing sec­tor in South­east Europe (SEE) in 2013?

The bank­ing sec­tor in South­east Europe (SEE) was sta­ble in 2013, but se­ri­ous chal­lenges re­main: the level of non-per­form­ing loans (NPLs) is high, delever­ag­ing con­tin­ues and credit growth in the past few years has been very weak, in some cases even neg­a­tive. On the pos­i­tive side, there have not been any sys­temic bank fail­ures in 2013. The sec­tor has ben­e­fited from an im­prove­ment of the over­all eco­nomic per­for­mances, for in­stance growth picked up in Mace­do­nia, Ro­ma­nia, Ser­bia and Mon­tene­gro in 2013. This was a bet­ter year from the eco­nomic point of view. How­ever, it was mainly driven

by ex­ports, in­dus­trial pro­duc­tion and agri­cul­ture, not the fi­nan­cial sec­tor.

For­eign banks con­tin­ued to dom­i­nate in the re­gion with their share in to­tal bank­ing sec­tor rang­ing from 70% in Bul­garia to more than 90% in Mace­do­nia and Mon­tene­gro.

Where in the re­gion do you see weak­ness in terms of lend­ing mo­men­tum and where are you wit­ness­ing pock­ets of re­cov­ery?

The vul­ner­a­ble state of the eco­nomic re­cov­ery, in the re­gion as well as in Europe at large, re­mains prob­lem­atic and eco­nomic growth is volatile. Some of the economies that en­joyed growth last year, such as Ro­ma­nia or Mace­do­nia, are likely to con­tinue with sim­i­lar rates this year. But some may see growth fall­ing or pos­si­bly even turn­ing neg­a­tive this year. For in­stance, Ser­bia suf­fered se­vere dam­age by floods in May and is fac­ing a tight fis­cal sit­u­a­tion. Bos­nia and Herze­gov­ina was also badly dam­aged by floods. And Al­ba­nia has started im­ple­ment­ing aus­ter­ity mea­sures un­der the new IMF pro­gramme.

So it is not sur­pris­ing that lend­ing is not pick­ing up. Banks are much more re­luc­tant to lend but they also find it dif­fi­cult to iden­tify good projects, es­pe­cially in the vi­tal small and medium-sized en­ter­prise sec­tor (SME). It is a vi­cious cir­cle: banks are re­luc­tant to lend, and busi­nesses are re­luc­tant to con­sider go­ing to banks.

When do you ex­pect to see a tan­gi­ble pick-up in lend­ing ac­tiv­ity in the re­gion?

It is im­pos­si­ble to give such a time­line and pre­dict when lend­ing will pick up as it de­pends on a com­bi­na­tion of fac­tors. But there are things that author­i­ties can do to stim­u­late lend­ing. Mainly it will de­pend on how quickly press­ing prob­lems in the fi­nan­cial sec­tor will be ad­dressed such as the high-level of NPLs, one of the main fac­tors hold­ing banks back from lend­ing.

How­ever, what is im­por­tant for SEE is that, un­der the broader um­brella of the Vi­enna Ini­tia­tive - a frame­work for safe­guard­ing the fi­nan­cial sta­bil­ity of emerg­ing Europe launched at the height of the first wave of the global fi­nan­cial cri­sis in Jan­uary 2009, for­eign banks have re­mained en­gaged. Al­though the process of delever­ag­ing con­tin­ues, it is im­por­tant that it does hap­pen in a co­or­di­nated way and in steps rather than in leaps.

Once there is sus­tain­able growth, and there are in­di­ca­tions that we will see a pickup next year, we can ex­pect to see an in­crease in lend­ing, al­though not in­stantly. That said one should not ex­pect a re­turn to the growth rates of the early 2000s, when credit growth in some coun­tries was 30% or 40% per year. So, the over­all re­turn to “nor­mal” sus­tain­able growth will be a lengthy process.

In par­tic­u­lar, what is your view of the ease of ac­cess to credit fi­nanc­ing that the cor­po­rates in the re­gion en­joy?

Ac­cess to fi­nanc­ing con­tin­ues to be one of the biggest ob­sta­cles, par­tic­u­larly for entrepreneurs and small busi­nesses in all coun­tries of the SEE re­gion. The EBRD is thus work­ing at im­prov­ing the ac­cess to fi­nance through the pro­vi­sion of whole­sale long-term funds to part­ner fi­nan­cial in­sti­tu­tions for ded­i­cated pur­poses such as on-lend­ing to SMEs.

What role could multi-lat­eral lenders like the EBRD play in boost­ing lend­ing ac­tiv­ity in the re­gion? Do you plan to step up your level of en­gage­ment in this area?

Work in the fi­nan­cial sec­tor has al­ways been a key goal and a core com­pe­tency of the EBRD. The bank played an im­por­tant role in the de­vel­op­ment of a mod­ern bank­ing sec­tor in the re­gion, able to serve the econ­omy and pri­vate cus­tomers. From the start of the cri­sis, the EBRD has been work­ing with other in­ter­na­tional fi­nan­cial in­sti­tu­tions (IFIs), lo­cal author­i­ties and in­ter­na­tional bank­ing groups un­der the Vi­enna Ini­tia­tive to safe­guard the fi­nan­cial sta­bil­ity and pre­vent un­co­or­di­nated with­drawals from the re­gion. To­day, the fo­cus is on reignit­ing the lend­ing process.

One im­por­tant step in this di­rec­tion is boost­ing the con­fi­dence of bor­row­ers and lenders. The de­posit in­sur­ance funds, which we are sup­port­ing in Al­ba­nia, Bos­nia and Herze­govi-

Co­or­di­nated ap­proach among banks and reg­u­la­tors would in­crease the chances of a suc­cess­ful out­come in tack­ling NPL lev­els.

na, Kosovo and Mon­tene­gro and plan­ning to sup­port in Ser­bia, are one im­por­tant ex­am­ple.

An­other ex­am­ple is the mul­ti­tude of frame­works and funds we have set up to pro­vide tar­geted sup­port to, say, SMEs, lo­cal en­ter­prises, agri­cul­ture, en­ergy and re­source ef­fi­ciency, and in­no­va­tion. By chan­nelling our fi­nanc­ing through lo­cal banks and other non­bank fi­nan­cial in­ter­me­di­aries such as leas­ing com­pa­nies or mi­cro fi­nance in­sti­tu­tions, we help them de­velop their ca­pac­ity and knowl­edge in deal­ing with these spe­cialised types of fi­nanc­ing on a sus­tain­able ba­sis.

Within the Vi­enna Ini­tia­tive we are work­ing on the reg­u­la­tory side in high-level pol­icy di­a­logue with su­per­vi­sors and author­i­ties on leg­is­la­tion nec­es­sary to fa­cil­i­tate the res­o­lu­tion of such prob­lems as the per­sis­tent high level of NPLs.

What is your view of the pace of con­sol­i­da­tion in the SEE bank­ing sec­tor? What fac­tors could speed up this process? How is the high frag­men­ta­tion af­fect­ing the SEE banks' abil­ity to lend to the cor­po­rate sec­tor?

A con­sol­i­da­tion of the bank­ing sec­tor in the re­gion is nec­es­sary as the cur­rent num­ber of banks in re­la­tion to the size of the economies and pop­u­la­tion may not be sus­tain­able.

Con­sol­i­da­tion has been grad­ual over the past few years. While we en­cour­age the process we also want to see strong com­pe­ti­tion main­tained, which is vi­tal for a vi­brant econ­omy.

How­ever, there is a level be­yond which com­pe­ti­tion does not im­prove bank­ing ser­vices, but in­stead leads to frag­men­ta­tion, which ad­versely af­fects the banks' abil­ity to ex­tend lend­ing. This is also a ques­tion of the right reg­u­la­tory frame­work. At the mo­ment, de­pleted val­u­a­tion of banks and par­ent fund­ing re­place­ment can be ob­sta­cles to merg­ers and ac­qui­si­tions.

What near- to mid-term chal­lenges do you see for the de­vel­op­ment of the SEE bank­ing sec­tor?

The biggest ob­sta­cle for the de­vel­op­ment of the bank­ing sec­tor re­mains the high level of NPLs, ac­count­ing for up to, or even above, 20% of to­tal loan port­fo­lio in some coun­tries. The sec­ond biggest ob­sta­cle is the weak lo­cal cur­rency cap­i­tal mar­kets, which need to be de­vel­oped, with a high level of “eu­roi­sa­tion” in the sys­tem.

Non-bank sources of fi­nance - such as as­set­based lend­ing, leas­ing, fac­tor­ing, etc - re­main lim­ited and need to be de­vel­oped to in­crease the lev­els and ef­fi­ciency of fi­nan­cial in­ter­me­di­a­tion in the re­gion.

As Euro­pean banks re­pair their balance sheets and re­think their busi­ness mod­els in a con­text of stricter reg­u­la­tory re­quire­ments, fi­nan­cial frag­men­ta­tion and delever­ag­ing is a con­tin­u­ing prob­lem in the SEE re­gion. In ad­di­tion, the need of bank­ing con­sol­i­da­tion is a gen­eral trend in the re­gion. The EBRD is work­ing with other IFIs to sup­port the strength­en­ing of the fi­nan­cial sec­tor by pro­vid­ing both cap­i­tal and re­fi­nanc­ing, and con­duct­ing high-level pol­icy di­a­logue to help author­i­ties deal with the pol­icy frame­work to ad­dress the chal­lenges the sec­tor is fac­ing.

What, in par­tic­u­lar, is the risk that NPLs pose to the balance sheets of SEE lenders? Which SEE coun­tries do you see as more ex­posed to this trend than oth­ers?

Ad­dress­ing the level of NPLs is an ur­gent is­sue for SEE coun­tries be­cause deal­ing with bad-debt port­fo­lios is time-con­sum­ing and dis­cour­ages new lend­ing to the econ­omy. It is im­por­tant that a co­or­di­nated ap­proach among banks and reg­u­la­tors is adopted – this would in­crease the chances of a suc­cess­ful out­come. How­ever, the NPL prob­lem is mul­ti­fac­eted and there is no magic so­lu­tion.

First of all, a proper di­ag­no­sis is needed to de­cide which com­pa­nies with bad debts would be vi­able once the debts are re­struc­tured and which ones are non-vi­able and should be al­lowed to fail and be liq­ui­dated. This is a com­plex task that re­quires ex­per­tise and an en­abling le­gal frame­work. Author­i­ties should fo­cus on re­mov­ing bar­ri­ers to re­struc­tur­ing, while banks should work on iso­lat­ing im­paired loan port­fo­lios so that they can be dealt with ef­fec­tively and separately from the bank's core busi­ness.

While a sus­tain­able NPL res­o­lu­tion is a com­plex and time con­sum­ing task, some of the coun­tries, such as Slove­nia, are al­ready mak­ing sub­stan­tial progress to­wards it. Oth­ers, like Mon­tene­gro and Ro­ma­nia for in­stance, are also mak­ing ef­forts in deal­ing with the prob­lem and are steadily achiev­ing progress. There has been quite an ef­fort to push this for­ward but more needs to be done.

What could be done in terms of reg­u­la­tory over­sight and gov­ern­ment pol­icy to tackle the NPLs is­sue?

Non-bank sources of fi­nance - such as as­set based lend­ing, leas­ing, fac­tor­ing, etc - re­main lim­ited and need to be de­vel­oped.

This dif­fers from coun­try to coun­try. Some need to strengthen their laws on in­sol­vency in or­der to en­sure ef­fi­cient court and out-of-court pro­ce­dures. A lot is down to the banks which have to clean up their balance sheets, al­though some coun­tries may con­sider the so-called ‘bad bank' model, i.e. cen­tral­ized bank as­set man­age­ment funds. Ev­ery so­lu­tion costs time and money. There are dif­fer­ent ways to tackle NPLs: write-offs, carve-outs or wind-downs - for which banks need strong cap­i­tal re­serves, which reg­u­la­tors forced them to build up in re­cent years. But the cru­cial thing is to act, be­cause the cost of risk pro­vi­sion­ing of ex­ist­ing NPLs is weigh­ing heav­ily on banks' abil­ity to lend.

Vi­enna 2.0 as suc­ces­sor to the Vi­enna Ini­tia­tive has a work­ing group on NPLs. They have is­sued a re­port with guide­lines and are mon­i­tor­ing the sit­u­a­tion. The fo­rum is use­ful for bring­ing all par­ties to­gether to ex­change ideas and learn from each other.

The EBRD is also in­ten­si­fy­ing its en­gage­ment to work on NPL res­o­lu­tions and of­fer­ing tech­ni­cal as­sis­tance by its le­gal ex­perts and also con­sid­er­ing con­duct­ing market as­sess­ments in some coun­tries.

Jean-Marc Peter­schmitt, EBRD man­ag­ing di­rec­tor, Cen­tral and South­east Europe

The Euro­pean Bank for Re­con­struc­tion and De­vel­op­ment (EBRD) raised its in­vest­ments in South­east Europe, a re­gion that has re­mained par­tic­u­larly vul­ner­a­ble to the ef­fects of prob­lems in the euro­zone, to around 1.65 bil­lion euro in 2013 from 1.5 bil­lion...

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